Days Medical Aids Ltd. v Pihsiang Machinery Manufacturing Co Ltd.& Ors

A contractual renewal clause must be construed according to its language and commercial context. A provision making renewal available indefinitely for as long as permitted by law was too vague to operate as drafted; the valid agreement therefore provided for one five-year renewal only. A best endeavours obligation requires all steps which a prudent, determined and reasonable contracting party would take, subject to commercial reasonableness and a reasonable prospect of success. The exclusive distribution agreement had neither the object nor the effect of restricting competition under Article 81(1) of the EC Treaty. Community law also precluded application of the common-law restraint of trade doctrine to invalidate the agreement. The distributor validly renewed the agreement, and the supplier’s subsequent conduct amounted to repudiation.

The claimant was the exclusive European distributor of mobility scooters manufactured by the first defendant under an agreement dated 6 February 1996. The agreement imposed performance obligations on the claimant and granted it a right to renew for successive five-year periods, subject to specified conditions and the words “for as long as permitted by law”.

The defendants disputed the parties’ obligations, the claimant’s performance, the validity and scope of the agreement, its renewal, and the claimant’s entitlement to damages. They relied on the restraint of trade doctrine and Article 81 of the EC Treaty. The principal issues were the construction and effect of the renewal clause, the claimant’s performance, the competition-law consequences, and damages following the defendants’ repudiation.

1. Construction and renewal. The claimant’s renewal conditions were to endeavour to increase unit sales year on year, to have discharged its obligations under the agreement, and to maintain annual sales of at least 5,000 units. “Discharged its obligations” required an overall commercial assessment of performance, rather than a mechanical inquiry into every individual breach. The claimant had complied with the relevant obligations.
2. The words “for as long as permitted by law” were hopelessly vague. Applying Davies v Davies (1887) 36 Ch. D 359, the court could not determine the parties’ intended legal limit. The invalid qualification could not simply be removed, since that would create an unqualified perpetual right which the parties had not agreed. Clause 10 therefore provided for one five-year renewal only, ending on 5 February 2006.
3. The agreement did not extend to power chairs as a matter of construction. Subsequent dealings did not establish variation or estoppel, particularly since exclusivity for power chairs had been expressly raised but left unresolved.
4. The claimant had satisfied its best endeavours obligation. The obligation required commercially reasonable steps with a reasonable prospect of success, not the expenditure of resources irrespective of likely return. Sales and market share in continental Europe increased during the initial term.
5. Competition law and restraint of trade. The agreement did not have an anti-competitive object. Its terms and economic context showed a European vertical distribution arrangement aimed at promoting inter-brand competition, with no price-fixing or comparable hard-core restriction. Nor did it have an appreciable anti-competitive effect: the relevant wholesale market was European, competition was strong, entry was available, and the market was not foreclosed.
6. The agreement accordingly did not infringe Article 81(1). It would not have qualified for the Vertical Agreements Regulation because the exclusivity exceeded five years, and the conditions for individual exemption under Article 81(3) were not established. Nevertheless, Community law precluded application of the restraint of trade doctrine where Article 81(1) did not apply.
7. The claimant validly exercised its renewal right by paying $100,000. The agreement continued until repudiated by the first defendant, and the repudiation was accepted by the claimant’s letter of 26 April 2002. The claim was therefore established, subject to assessment of damages. The counterclaim failed.

First-instance judgment in the High Court (Commercial Court). No earlier appellate decision is stated in the judgment.